The Brazilian real’s dramatic drop has left the central bank with two options: jack up rates aggressively in one startling move, or tolerate higher inflation for longer.
For months, Latin America’s inflation has been surprisingly steady given the steep drop of their currencies. Weak growth helped curb prices – but that may be about to change.
Brazil’s President Dilma Rousseff is fighting for political survival less than a year after being re-elected. Several reasons have been pointed exhaustively to explain how things got so bad in such a short period of time: chief among them are the burgeoning corruption scandal at state-run Petrobras and stubbornly high inflation, out of sync with the rest of the world.
Brazil’s relentless series of interest rates hikes is successfully lowering inflation expectations – despite recent signs to the contrary, from lottery to tomato prices.
Brazil’s monthly inflation rate eased below 1 percent for the first time this year in April and inflation expectations for 2016 have dropped for the first time in two and a half months.
Expectations may have been pushed to later this year for when the U.S. Federal Reserve will hike interest rates, but a repeat of another steep sell-off in emerging market stocks appears unlikely as much has already been priced in – and because of the stronger dollar.